Futu Holdings Limited (NASDAQ:FUTU) Q3 2022 Results Conference Call November 21, 2022 7:30 AM ET
Company Participants
Daniel Yuan – Chief of Staff and Head, IR
Leaf Li – Chairman and CEO
Arthur Chen – CFO
Robin Xu – Senior Vice President
Conference Call Participants
Cindy Wang – China Renaissance
Zoey Zong – Jefferies
Leon Qi – Daiwa
Frank Zheng – Credit Suisse
Emma Xu – Bank of America
Peter Zhang – JP Morgan
Operator
Hello, ladies and gentlemen. Welcome to Futu Holdings Third Quarter 2022 Conference Call. At this time, all participants are in a listen-only mode. After management’s prepared remarks, there will be a Q&A session. Today’s conference call is being recorded. If you have any objections, you may disconnect at this time.
I would now like to turn the conference over to your host for today’s conference call, Daniel Yuan, Chief of Staff and Head of IR at Futu. Please go ahead, sir.
Daniel Yuan
Thanks, operator, and thank you for joining us today to discuss our third quarter 2022 earnings results.
Joining me on the call today are Mr. Leaf Li, Chairman and Chief Executive Officer; Arthur Chen, Chief Financial Officer; and Robin Xu, Senior Vice President.
As a reminder, today’s call may include forward-looking statements, which represent the Company’s belief regarding future events, which by their nature are not certain and are outside of the Company’s control. Forward-looking statements involve inherent risk and uncertainty. We caution you that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statements. For more information about the potential risks and uncertainties, please refer to the Company’s filings with the SEC, including its registration statement.
So, with that, I will now turn the call over to Leaf. Leaf will make his comments in Chinese and I will translate.
Leaf Li
[Foreign Language]
Daniel Yuan
Thank you all for joining us today. As of quarter end, we had 1.44 million paying clients, representing a 24% year-over-year growth. In the third quarter, we added 58,000 paying clients, a 5% sequential decline due to stock market tumble. Despite the market downturn, we achieved over 98% quarterly paying client retention rate for each of the five countries and regions for the first time. Our industry-leading retention metric speaks to the stickiness of our product and the resilience of our premier client base.
Leaf Li
[Foreign Language]
Daniel Yuan
In Singapore, new paying client growth accelerated by over one-third sequentially as we successfully launched targeted online and offline marketing campaigns around mutual funds and expanded client acquisition channels. We were able to attract many allocation driven clients who gravitated towards lower risk mutual funds, amid market volatility.
In the U.S. market, client growth remained robust as we iterated on online marketing and deepened our collaboration with KOLs. The deceleration of client acquisition in Hong Kong was mainly due to sluggish equity market performance and to a lesser extent limited traction of our promotions around silver bond. Residents between the age of 35 and 55 will remain our priority in Hong Kong, as our current penetration is around 10%, offering significant room for further growth.
Leaf Li
[Foreign Language]
Daniel Yuan
Total client assets declined 13% year-over-year and 15% quarter-over-quarter to HK$370 billion. While the challenging equity market weighed on client portfolio valuations, net asset inflow remained strong. In Singapore, total client assets grew by 11% quarter-over-quarter due to higher-quality new clients and strong asset inflows.
Leaf Li
[Foreign Language]
Daniel Yuan
Total trading volume declined 19% sequentially to HK$1.1 trillion, of which U.S. stock trading constituted 69%. Lower turnover of technology names led to a 16% sequential decline in the U.S. stock trading volume, partially offset by strong trading interests in leveraged and inverse ETFs. Hong Kong stock trading volume was HK$304 billion, down 28% sequentially amid deteriorating market sentiments across all sectors. Margin financing and securities lending balance increased by 2% sequentially, driven by clients’ bottom fishing of Chinese new economy names.
Leaf Li
[Foreign Language]
Daniel Yuan
Client assets in wealth management grew 47% year-over-year and 19% quarter-over-quarter to HK$26 billion. In Singapore, we became exclusive distributor of a newly launched USD-denominated money market fund with people [ph] zero settlement, the first of its kind in Singapore. We also introduced SmartSave in Singapore, which gives our clients the option to automatically subscribe for and redeem money market funds, based on the cash positions in their trading accounts. We were intentional about adding money market products and enhancing their functionality amid a rate hike environment, thereby growing our wealth management assets in Singapore by 5-fold quarter-over-quarter. Client assets in private funds increased by 67% sequentially, mainly attributable to a new cash management product that offers 4.2% expected annualized return for professional investors with a one month lockup. As of quarter end, wealth management penetration among paying clients increased from 15% in the second quarter to 17%, as we continue to expand fund offerings and upgrade product features.
Leaf Li
[Foreign Language]
Daniel Yuan
Our enterprise business had 301 IPO and IR clients as well as 572 ESOP clients as of quarter end, up 40% and 76% year-over-year, respectively. Over 50 companies adopted our ESOP services during the quarter, including Ganfeng Lithium and MicroPort. In the first three quarters of this year, we underwrote 23 Hong Kong IPOs and ranked second among all brokers, according to Wind.
Leaf Li
[Foreign Language]
Daniel Yuan
Next, I’d like to invite our CFO, Arthur to discuss our financial performance.
Arthur Chen
Thanks Leaf and Daniel. Please allow me to walk you through our financial performance in the third quarter. All the numbers are in Hong Kong dollars unless otherwise noted.
Our total revenue was HK$1.9 billion, up 12% from HK$1.7 billion in the third quarter of 2021. Brokerage commission and handling charge income was HK$958 million, an increase of 3% year-over-year and a decrease of 7% Q-o-Q. The year-over-year increase was mainly driven by a higher blended commission rate of 8.8 basis points, up from 6.9 basis points in the year ago quarter. The Q-o-Q decrease was due to close to 20% sequential decline in trading volume, partially offset by the higher blended commission rate.
Interest income was HK$881 million, an increase of 39% year-over-year and 42% Q-over-Q. The year-over-year increase was mainly due to higher income from cash deposits, which more than offset lower margin financing income and IPO financing interest income. The Q-o-Q increase was mostly attributable to higher interest income from cash deposits and higher margin financing income.
Other income was HK$107 million down 36% year-over-year and up 16% Q-over-Q. The year over year decrease was mainly due to lower IPO financing service charge income, enterprise public relationship service charge income and the currency exchange service income. The Q-over-Q increase was mainly due to some one-off income items.
Our total costs were HK$218 million, a decrease of 18% from HK$267 million in the third quarter of 2021.
Brokerage commission and handling charge expenses were at HK$83 million, down 34% year-over-year and 5% Q-over-Q. The commission expenses didn’t move in line with brokerage commission income due to the cost saving from our U.S. sales clearing migration and upgrade service package with our U.S. clearinghouse. The Q-over-Q decrease was mainly due to lower trading volume.
Interest expenses were HK$41 million, down 40% year-over-year and up 6% to 8% Q-over-Q. The year-over-year decrease was mostly due to lower expenses from interest — from margin financing and the securities lending. The sequential uptick was driven by higher daily average margin financing balance and higher blended funding costs amid rate hike.
Processing and servicing costs were HK$91 million, up 35% year-over-year and down 3% Q-over-Q. The year-over-year increase was primarily driven by higher cloud service fees to support our overseas market expansion.
As a result, total gross profit was HK$1.7 billion, an increase of 18% from HK$1.5 million in the third quarter of 2021. Gross margin was 89% expanded from 85% in the third quarter of 2021.
Operating expenses were HK$761 million, down 0.3% year-over-year, up 5% Q-over-Q.
R&D expenses were HK$313 million, up 40% year-over-year and 7% Q-over-Q. The increase was mainly due to increasing R&D headcount as we continue to support new product offering, invest in U.S. sale clearing capabilities and the customized product experience for different new markets.
Selling and market expenses were $235 million, down 42% year-over-year, up 7% Q-over-Q. The year-over-year decrease was mainly due to slowing paying client growth. Expenses increased Q-over-Q as client acquisition costs hiked due to weak market sentiment.
G&A expenses were HK$212 million, up 55% year-over-year and 1% Q-over-Q. The increase was primarily due to increase in headcount for general and administrative personnel.
As a result, our net income increased by 23% year-over-year and 18% Q-over-Q to HK$755 million. Net income margin expanded to 39% in the third quarter as compared to 36% in the same quarter last year.
Our effective tax rate for the quarter increased to 12.2% as the tax credit from our U.S. clearing has been fully utilized.
That concludes our prepared remarks. We now like to open the call to questions. Operator, please go ahead.
Question-and-Answer Session
Operator
[Operator Instructions] Thank you. We’ll now take our first question. Please stand by. This is from the line of Cindy Wang from China Renaissance. Please go ahead.
Cindy Wang
[Foreign Language]
My first question is regarding to the interest income in third quarter. Things are interesting, show very strong growth in third quarter. Could you give us a breakdown by margin financing income, bank deposit and IPO financing interest income in third quarter? Since Fed rate hike was another 75 bps in November and possibly to raise another 50 bps in December, how do you see the contribution from bank deposit in fourth quarter?
The second question is regarding to the commission rate. In third quarter, the commission rate was up again to 8.8 bps. Could you give us the reasoning behind it, and how sustainable for the rate in fourth quarter? Thank you.
Arthur Chen
Thank you, Cindy. This is Arthur. I’ll take two of your questions. First of all, the interest income. I think the contribution from the IPO margin financing is relatively small. So, most of our interest income now comes from the client’s idle cash and also our margin business, which I think you’re right, we are one of the beneficiaries from the rate hike cycle. Especially in the first quarter we see we see the contribution from the — client deposits becomes more meaningful. And down the line I think on a like for like basis, it may contribute even more interest income in the fourth quarter.
But having said that, you can understand that our interest income actually comes from two parameters, one is the interest rate i.e. the deposit rate we get from the banks. The other is the clients’ idle cash average balance which may be related to the market volatilities. For instance in the third quarter, the market becomes very challenging and we can see the average cash balance among our clients become much higher, they lower down their stock position. So, I’m not sure whether such allocations, both as a clients’ stock and clients’ cash will remain in the fourth quarter or not. But if assumed such ratio remained the same versus the third quarter, I think we will get more interest income in the fourth quarter.
For your second question about the blended commission rate, that comes from several factors. Number one, as Leaf mentioned, in the third quarter, our U.S. trading contributions roughly account for close to 17%, [ph] which has positively impacted our blended commission rate. It is very difficult to forecast whether such positives will continue or not, given it is more driven by the market conditions.
And secondly, the trading volatility in the third quarter comes — more clients trading derivative such options and the futures et cetera. In third order, our trading commission — among our trading commission, roughly 30% came from client activities in the derivatives. So, it will enhance our blended commission rate as well. Thank you.
Cindy Wang
Thank you. Very clear.
Operator
Thank you. We’ll now take our next question. Please stand by. This is from the line of Zoey Zong from Jefferies. Please go ahead.
Zoey Zong
[Foreign Language]
Thank you, management, for taking my questions. This is Zoey Zong from Jefferies. Congratulations on solid results. And I have two questions. So first, we have already achieved our annual target of acquiring 200,000 new paying clients. So wondering, based on the current market conditions, could you please provide some color about our user acquisition in Q4 and next year?
And my second question is regarding our Singapore business. As we have seen strong growth in the number of new paying clients and client assets, wondering how many total paying clients do we have in Singapore as of Q3, and what about the average asset for paying clients? How do we think about the penetration rate and upside? Thank you.
Arthur Chen
Thank you, Zoey. I will take your first question and I will leave your second question to my colleagues, regarding the situation in Singapore. For your first question, you are right. We are already approaching our full year guidance for 200,000 in new paying clients acquired this year. Quarter-to-date, I think you can understand and everybody can imagine the market condition was quite challenging across the U.S. and also the Asian markets as well. So, based on the current quarter-to-date run rate, we think the new clients acquired in the fourth quarter may be smaller or slower than the third quarter. But we are very confident we will continue to acquire clients across the different markets. And also quarter to date we still record decent net asset inflows across the different markets.
It is too early to give you some sense or the guidance for our next year’s — the new paying clients guidance. We will keep you posted in our fourth quarter earnings call. Thank you.
Leaf Li
[Foreign Language]
Daniel Yuan
In Singapore, we have over 200,000 paying clients now, which we think is about 15% of market share, and we think there’s a lot of room for further growth. And in the third quarter, we recorded decent growth. It’s mainly because we introduced lower risk wealth management products, such as money market funds, to capture the conservative investment appetite of Singapore clients.
And in the rate hike environment, the yields of the money market funds kept rising and become rather attractive to Singapore clients. And that’s driving the growth of local new paying clients. And we also continue to optimize the account opening and the deposit process, thereby driving conversion from users to clients and also to paying clients. And meanwhile, we also saw improving client quality. So, for the clients that we acquired in third quarter, the average net asset inflow in the first month exceeded 9,000 Singapore dollars, while the average net asset inflow in clients acquired in January this year will take about three months to reach this level.
And as of the end of 3Q, the average assets of our Singapore clients was over 10,000 Singapore dollars, recording a modest Q-on-Q growth, and the increase in net asset inflow was able to more than offset the negative impact of the weak equity market. Thank you.
Operator
We’ll now take our next question. Please stand by. This is from the line of Zeyu Yao [ph] from CICC. Please go ahead.
Unidentified Analyst
[Foreign Language]
Okay. I will translate my question. Thanks management for taking my question. This is Zeyu Yao [ph] from CICC. First, congratulations on the exciting results achieved this quarter, despite the volatile market environment. I have two questions here. The first one is about the client region breakdown. Would you please introduce more on the region breakdown of the newly added and also the existing paying clients? And also my second question is about client assets breakdown. We see that the total client assets decreased by 15% quarter-over-quarter? Would you please give us a breakdown of the asset inflow and the market to market demand?
Arthur Chen
Thank you. My colleague, Robin, will answers two of your questions. Thank you.
Robin Xu
[Foreign Language]
Daniel Yuan
First of all to your question on the breakdown of our paying clients. So among the new additions and the third quarter, Asia contributed about half of that, among which Singapore was the main contributor followed by Hong Kong, and the U.S. contributed roughly the other half. And as of the end of the third quarter, so overseas paying clients was around 30% in which Singapore outnumbered the U.S. by a small margin. And then, in total, Hong Kong contributed close to 40%. And overall Singapore and U.S. each contributed less than 20% of our overall paying client base.
And to your question on client assets, so market fluctuations and clients’ net asset inflows were the most important factors affecting our total client assets. And in third quarter the net asset inflow in clients, in all markets were quite robust and the total amount remained flat compared with the second quarter. However, the decline in Hong Kong and U.S. stock markets dragged down the total client assets. Thank you.
Operator
We’ll now take the next question. Please stand by. And this is from Leon Qi from Daiwa.
Leon Qi
[Foreign Language]
This is Leon Qi from Daiwa Securities. Thanks a lot for management for taking my questions. I have two questions today, one on Singapore and the other Hong Kong. Singapore, I just want to know that what management is thinking about in terms of your future product pipeline. Understand you have been launching in money market funds and the wealth management products in order to expand your product ecosystem, especially now equity related. What else in our product ecosystem toolbox? Are we considering any new asset classes or sub classes, for example, crypto? Wondering how management thinks about these new asset classes.
Second question is on Hong Kong. Well, understand there is still substantial upside in terms of per customer AUM in Hong Kong. But I appreciate if management can give any color on your user upside in Hong Kong. Do you think Hong Kong is already quite penetrating in terms of our current position? How do we see our future growth from Hong Kong? Is there from new users or from per user AUM? Thanks a lot.
Arthur Chen
Thanks a lot Leon. My colleague, Robin, will answer your first question about the Singapore; and our founder, Mr. Leaf Li will answer your second question about Hong Kong. Thank you.
Robin Xu
[Foreign Language]
Daniel Yuan
So, since last year, we have continued to enhance our product functionality in Singapore. And going forward, we have a couple of new products that we want to roll out to the retail clients, including the Hong Kong options trading and select U.S. options trading as well. And we also plan to launch leverage ForEx trading in Singapore, and also bond trading. And we also acquired self-clearing license in Singapore. So, going forward, we’ll build our self-clearing capability and allow our clients to transfer their assets to CDP accounts. And last but not least, I think we’re also investing into our enterprise services, mostly geared towards a lot of family offices in Singapore. Thank you.
Leaf Li
[Foreign Language]
Daniel Yuan
So lately, Futu’s penetration rate of our Hong Kong retail investors is around 20 per client. And we think nearly 10% of the middle aged, aka 35 to 55 per client — sorry, 35 to 55 year old Hong Kong residents. So, our penetration among our population is around 10%. And I will continue to focus on further penetrating these client cohorts. In the long run, we’ll also pay more attention to asset related matrices, such as clients’ net asset inflows. And we intend to continue to increase the wallet share of our clients through expansion of our product offerings, and also increase in client engagement. Thank you.
Operator
We’ll now take our next question. Please stand by. This is from the line of Frank Zheng from Credit Suisse. Please go ahead.
Frank Zheng
[Foreign Language]
First question is on new market entrees. What is our current progress in terms of exploring new markets and any tangible plans in 2023? Second question is on current acquisition expense. We note that in the third quarter CAC is around HK$4,000, how shall we think about CAC going forward? Also company mentioned 1% to 1.5% expense ratio based on net asset inflow. Are we on track in terms of this metric?
Arthur Chen
I will take your second question first and our founder, Mr. Leaf Li, will answer your first question about new market expansion. For the CAC, I can understand everybody may be slightly disappointed about our third quarter results. I think there are some reasons behind that. Number one is definitely the market conditions in the third quarter is quite very challenging. Secondly, we actually continue to make some brand equity efforts in Hong Kong and in Singapore, despite some of our peers start to set back their marketing campaigns, as we do think in brand equity building up is a very long-term process and we need some patients in the market volatility conditions.
And thirdly, as Leaf mentioned in opening remarks, we try to do some new initiatives, such as silver bond promotions in Hong Kong, which unfortunately didn’t pay out very well, which increase our CAC in the third quarter.
Down the road I think in the fourth quarter maybe continue very challenging given the quarter-to-date market conditions. So, our CAC levels in the fourth quarter may continue to be on a relatively high levels.
For the asset acquisition costs, I think you’re right we are still well on track in the range of 1% to 1.5% year-to-date. Thank you very much.
Leaf Li
[Foreign Language]
Daniel Yuan
We expect to enter into new overseas markets in the first half of next year. And we’re also dynamically exploring the opportunities in some overseas markets. And we also consider launching certain select product features in a new market first for validation purposes and collect the feedback from the market, so as to constantly optimize and upgrade the products to meet the needs of the local clients. Thank you.
Operator
Thank you. We’ll now take our next question. Please standby. This is from the line of Emma Xu from Bank of America. Please go ahead.
Emma Xu
[Foreign Language]
So, my question is about your U.S. market. As management just mentioned that U.S. market contributed to around 30% of new clients in third quarter. So, this will be a very important new market for your company. Could you tell us what’s your plan for this market in the medium to longer term? And could you tell us what’s your client characteristics in this market? For example, the average client assets, the client acquisition costs for U.S. clients as well as payback period?
Arthur Chen
Okay. Our founder, Leaf, will answer this question. Thank you.
Leaf Li
[Foreign Language]
Daniel Yuan
We continue to iterate on client incentives and across various channels in the U.S. and our continued marketing and our co-operations with KOL helped improve our brand awareness in the U.S. market. And despite the acceleration of client acquisition, average assets per paying client has decreased as market downturn offset strong net asset inflows of our clients.
And looking into the fourth quarter and as result of the upcoming holiday season, we expect the sentiment to affect some U.S. clients’ willingness to open accounts and transfer funds, causing client acquisition to slow down in the U.S. In the meantime, we will continue to focus on improving the client quality and the efficiency of client acquisition.
And in terms of client acquisition costs, right now, the CAC in the U.S. is lower than the overall group’s client acquisition cost. However, the payback period will be much longer. I think we are still patient on our monetization in the U.S. as we plan to rollout a number of new product features in the coming quarters that we think can meaningfully improve monetization. Thank you.
Operator
Thank you. We’ll now take our next question. Please stand by. This is from the line of Peter Zhang from JP Morgan. Please go ahead.
Unidentified Analyst
[Foreign Language]
Okay. Let me do the translation. This is Peter Zhang from JP Morgan. Congratulations on the strong results. My first question is about the market share in Hong Kong. We noticed that the Futu’s trading volume in Hong Kong declined by 28% quarter-over-quarter while Hong Kong — the total trading volume in Hong Kong market declined by 18%. So, we wish to understand what’s the reason behind. My second question is on the IT spending. Management gave guidance of 20% headcount increase in 2022. I wish to check what’s the progress on this initiative and what will be the R&D expense trend going forward?
Arthur Chen
Thank you. I will take both of the questions. I think number one, the comparison is our trading volumes change patterns versus the overall markets. The reason behind in my humble view is that the overall markets including retail investors and also institutional investors, when the market becomes extremely volatile and extremely challenging, normally institution investors trade more tactically and responsibly versus retail investors. Given certain revamps, few retail investors may continue to hold their positions, unlike institution investors will become more nimble and react to the market volatility. This is the question number one.
For question number two, I think year-to-date, we are on track in terms of the next new headcount increase in this year and in particular in terms of delta, the overall headcount increase has already peaked in terms of speed versus the past two years. So, down the line, I think, we are — we are still through the internal reevaluations about next year’s budget, in terms of headcount, but I do think the increase of the headcount, especially in the R&D side next year will be quite stable or the speed maybe smaller — even smaller than this year. Thank you.
Operator
Thank you. And this concludes the question-and-answer session. I would now like to hand back to Daniel for closing remarks.
Daniel Yuan
That concludes our call today. And on behalf of the Futu management team, I would like to thank you for joining us tonight. And if you have any further questions, please do not hesitate to contact me or any of our Investor Relations representatives. Thank you and goodbye.
Operator
Thank you. This does conclude the conference for today. Thank you for participating. And you may now disconnect.
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